By March, we'll be closer to pre-Covid levels: ESAF Small Finance Bank MD

ESAF Small Finance Bank (SFB) was one of the few microfinance institutions to secure an SFB licence. It is now in the process of getting listed. KADAMBELIL PAUL THOMAS, its managing director and chief executive officer, in conversation with Ishaan Gera, discusses the initial public offer (IPO) plans and the return to growth after Covid-19. Thomas says the bank expects to bring the microfinance portfolio down to 60 per cent of its book. Edited excerpts:
 
You are in the process of re-filing the draft IPO papers. When can we expect a listing?
 
We are in the process of filing our papers with the Securities and Exchange Board of India. We expect to complete it by the second quarter of the next financial year.

 

SFBs offer more attractive fixed deposit (FD) rates than universal banks. Wouldn’t this put pressure on your margins?
 
There is a historical background. Most SFBs were non-banking financial companies-microfinance institutions. When we started, our liabilities were mostly from bank borrowings. Before we converted into a bank, we were under pressure to either refund, close or grandfather loans within three years. For this reason, we offered a higher interest rate.
 
In the past few years, SFBs have reduced FD rates, even as other universal banks increased theirs. So the margin, or the difference between a universal bank’s and SFB’s rate, has come down. It has, in fact, narrowed. We can afford this, given most of our asset class is made up mainly of microfinance, which gives a higher margin.

 
Scheduled commercial banks have performed well in the first half of 2022-23 (FY23). What has been your performance like? And can it be sustained?
 
We have performed reasonably well during the past six months. We are confident about sustaining growth in the months and years to come. There is a lot of market opportunity ahead, given the economic growth India is targeting.
 
The rural and semi-urban areas play a crucial role, but the credit outflow to these rural semi-urban areas is less than 10 per cent. We have 70 per cent of our bank branches located in rural and semi-urban areas. We have a long experience of working with customers from these regions. Growth will happen in these markets. Our knowledge of working with rural artisans, weavers, farmers, and micro-entrepreneurs will give us an edge over the rest.

 
Net profit growth was in triple digits last year. Can we see something similar this year as well? What has credit growth been like?
 
In the past few months, we have focused on asset quality improvement. We were also implementing the new microfinance guidelines. We have tamped down credit growth during the past nine months. We have grown only 10 per cent. We will be growing in the current quarter (fourth quarter of FY23) because the systems are in place, and asset quality has improved substantially. On the profit side, we are expecting a repeat of the previous year’s performance.

 
Has there been a full recovery after the pandemic, or are there segments that are yet to take off?
 
Over 79 per cent of our assets come from micro-loans – the fisherfolk, farmers, and weavers. There are some issues, especially in cyclone-affected areas. By March, we will be closer to pre-Covid levels. Except for a few areas, collections are back to normal.
 
You are still a niche segment player. Are there plans to enter new geographies and diversify from microfinance loans?
 
Yes. When we started, the entirety of our assets was in microfinance. We have brought them down to 79 per cent. Product diversification is underway. We have introduced gold loans, which are 10 per cent of the book. We have also introduced loans for agriculture, micro, small and medium enterprises, mortgage, and mobility during the past four/five years.

 
In another three years, micro-loan concentration will come down to 60 per cent. But we will continue to serve the bottom-of-the-pyramid segments.
 
Without losing that focus, we will grow other books. When we started, we had a presence in only 10 states. Today, we are present in 20 states and two Union Territories. We are opening more branches in new geographies, especially Uttar Pradesh, Rajasthan, and Haryana. In two to three years, we will see results.